Banker Survey: CFPB’s QM Exemption Too Narrowly Defines 'Rural'

Many residents in rural America would have reduced access to mortgage credit from community bankers despite a rural lender qualified mortgage exemption on balloon-payment mortgages included in rules finalized by the Consumer Financial Protection Bureau.

The Independent Community Bankers of America’s Community Bank Qualified Mortgage Survey, released Thursday, reported that community banks in rural communities often make non-traditional loans such as balloon mortgages. The loans are not eligible to be sold into the secondary market, so they are kept on the bank’s books, giving community banks a vested interest in the loans and allowing them to work out a solution if repayment problems arise.

While balloon loans made by small creditors that operate predominantly in rural or underserved areas are deemed to be qualified mortgages under the CFPB mortgage rules, the bureau’s definition of rural is too narrow, leaving out too many communities and unnecessarily cutting off access to credit, the ICBA has argued.

The ICBA conducted the survey to gather data on the impact of the accommodations for community banks in the CFPB’s new ability-to-repay and qualified mortgage rules.

Additionally, the survey found that:

• Among the 75% of respondent community banks that currently make balloon-payment mortgage loans, less than half (46%) would qualify for the rule’s provision for balloon mortgages.

• For respondent community banks that consider themselves to be rural banks, 44% do not qualify as “rural” under the rule’s definition.

• Among the community banks that do not qualify for the balloon exception, 43% are disqualified primarily on the basis of the definition of “rural.”

• Respondent community banks hold an average of 64% of originated residential mortgage loans in their portfolio for the life of the loan. The majority of respondent banks (52%) hold at least 80% or more of the loans originated for the life of the loan.

• Only 33% of the respondents originate and hold adjustable-rate mortgages in portfolio.

As a result, the ICBA is encouraging the CFPB to expand the definition of qualified mortgage to include additional loans held in portfolio by small creditors, including balloon payment mortgages originated by small creditors in non-rural markets.

The banker trade association also is asking the CFPB to expand the definition of “rural” for balloon mortgage loans and escrow requirements to include all counties outside metropolitan statistical areas and towns with fewer than 50,000 residents.

The survey, which was conducted Feb. 7-14, received 380 responses, for a response rate of approximately 8%.